The eye of CEIOPS
Ahead of the 23 September deadline for the implementation of European occupational retirement provision (IORP), directive the Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has published a discussion paper on the role of supervisory co-operation in facilitating membership of cross-border pension funds.
Europe has a wide diversity of national pension systems and, similarly, there is a variety in the size of the state’s private sectors, the identity of the risk-bearer (employer and/or employee), the legal form of private pension institutions and the financing method (DB, DC of hybrid). However, where private elements are part of a national pension system in developed countries, occupational pension arrangements dominate the market.
Further, the world’s 20 largest private pension entities are exclusively occupational pension funds. And although within a couple of decades personal-type funds are likely to gain momentum - especially given the new development of DC personal pension funds in the US, Latin America and central and eastern Europe - current legislation must aim to regulate the operation of occupational pension funds.
The creation of common market for goods, investments, people and services is fundamental to the EU’s existence. In the pension field there is an EU regulation for the operation of pan-European pension funds which covers portability issues and, further ahead, will include taxation. And this approach must be widened to cover personal plans too.
However, our current task is to support the operation of pan-European funds. Who are they?
The employees of multinational companies that have pension funds in at least two EU member states are the most likely direct beneficiaries of the creation of pan-European funds at the beginning.
CEIOPS was established by the European Commission (EC) on 5 November 2003 as an independent Level III committee to advise the EC in the preparation of draft implementation measures, issue its own standards in the field of insurance and occupational pensions in areas not covered by EU directives and work for the common implementation of EU directives.
It serves as a forum for the co-operation and exchange of information between supervisory authorities, but it is not allowed to address labour and social law aspects or to consider specific problems relating to individual institutions. A consultative panel of market participants maintains a general overview of the CEIOPS process and advises on current market issues.
The occupational pensions committee is one of the working groups established to assist CEIOPS in its objectives. It deals with non-state pensions with a focus on the challenges of the implementation of the directive (2003/41/EC Directive on the activities and supervision of institutions for occupational retirement provision) and consists of the supervisory authorities of 19 member states.
I am its chairman and also the deputy managing director of the Hungarian Financial Supervisory Authority (HFSA) where the committee’s secretariat is located. It aims to facilitate the co-operation and information exchange between occupational pension supervisors to achieve the smooth implementation and application of the directive.
The committee’s main tasks are to:
q prepare a protocol to define the co-operation, co-ordination and regular information exchange between the occupational pension supervisors with a view to implementing the directive;
q analyse the current status of the pension savings institutions with regard to EU legislation;
q monitor ways to calculate technical provisions, progress achieved in the adaptation of investment rules and the use of depositaries in the national supervisory systems; and
q support the development of the common understanding of the directive, particularly by pan-European pension funds.
The central element of the supervisory mission is the protection of the members’ interest, particularly in the supervision of occupational retirement provision institutions (IORPs). The directive prescribes the basic requirements for their registration, licensing and supervision. And while regulatory and supervisory levels may need to be enhanced in certain countries, the more important challenge is the supervision of the so-called pan-European pension funds with cross-border membership.
The basic supervisory framework for pan-European pension funds is that:
q Each member state’s law must be in line with the directive which says that each host state has the right to require that a pension scheme comply with its social and labour law relevant to occupational pensions, meet its information requirements for fund members and, in certain circumstances, observe special investment restrictions.
q The home member state’s supervisory authority is responsible for the supervision of the whole operation of the fund, including a host state’s applicable investment restrictions, except for the scheme’s compliance with the host state’s social and labour law relevant to the field of occupational pensions and members’ information requirements.
q Effective supervision of this type of pension fund requires the supervisory authorities to co-operate, and this will be regulated by a protocol. The home state’s supervisory authority is responsible for taking any measures, including the imposition of sanctions, when informed of breaches of the host state’s relevant social and labour law and members’ information requirements. Where irregularities relate to the social and labour law, the home state supervisor will take the necessary measures in co-operation with the host state supervisor. If the pension scheme continues its infringements, the host authority is entitled to take steps to penalise or prevent further irregularities.
These requirements clearly reflect the most important supervisory challenge – the need to rely on each other’s supervisory approach.
When the occupational pensions committee started work in March 2004, the main issues that I as its chairman had to take into consideration were:
q Its immediate task was to develop a protocol within the 18 months to the deadline for the directive’s implementation.
q The committee should work by consensus but that following a discussion, a decision must be achieved at a CEIOPS members’ meeting.
q The pooling of experience and decisions during national implementation procedures, the development of a common understanding of the directive and the preparation of the protocol should be undertakken simultaneously and be mutually supportive.
q Time was limited for the drawing up of the committee’s terms of reference and working plan, and for the discussion of the protocol.
q As there was no previous pan-European pension funds experience, the knowledge of the various stakeholders needed to be built into the work on an ongoing basis. The publication of the committee’s findings at various stages would be useful and effective.
During the past 12 months :
q The committee has held six meetings and the OPRA-led sub-committee charged with preparing the protocol’s text and making necessary changes after the group discussions, held four meetings.
q We have organised two roundtable discussions with country presentations on the main issues of the directive’s implementation. They were followed by two questionnaires to exchange information (on optional application of the directive, content of investment policy, implementation phase, etc), experience (the use of the prudent person principle, etc) and to develop the common understanding of the directive (accepted actuarial methods, establishment of a branch, etc).
q The European Federation for Retirement Provision (EFRP) and the European Association of Paritarian Institutions (AEIP) have made presentations to the committee. I have briefed the CEIOPS consultative panel on the committee’s work.
q The committee has prepared a draft protocol on supervisory co-operation in less than a year.
The CEIOPS members’ meeting approved the protocol, known as the Budapest Protocol, as a discussion paper, on 24 February 2005 and submitted it for public comment.
The first part sets its scope as the EEA area. Supervisors may use standard documents as the basis for co-operation, for example for a description of the main characteristics of a pension scheme to be operated by the sponsors in the host state.
The second part regulates the authorisation and notification procedures of an IORP, and covers the initial dialogue between an IORP and the home authority.
The third part covers the exchange of information for ongoing supervision, which includes the dialogue between the competent authorities, the changes in information supplied about the laws and the IORP, the identification of non-compliance, the sharing of information about the supervisory interventions and the ring-fencing of the assets and liabilities.
Member states must define which social and labour law is relevant to occupational pensions in the host state. However, in many members this is the responsibility of ministries or other authorities rather than of the (CEIOPS) supervisor. Member states may exert considerable influence over the directive and the development of cross-border pension provision through this definition.
From this point of view, there are three types of supervisory authorities:
q those where CEIOPS supervisory authorities decide on the content of the relevant social and labour law and will be responsible for its communication;
q those where non-CEIOPS member competent authorities decide on the content of the relevant social and labour law but CEIOPS members will be responsible for its communication; q those where non-CEIOPS supervisory authorities decide on the content of the relevant social and labour law and they will be responsible for its communication.
The draft protocol has been published on the CEIOPS website (www.ceiops.org).
Mihály Erdös, chairman of CEIOPS occupational pensions committee and deputy managing director of the Hungarian Financial Supervisory Authority